5 ms·

Another detail that's not well-known unless you know someone who's gone through it: buying your shares comes with a huge tax bill. As I understand it, you have

Another detail that's not well-known unless you know someone who's gone through it: buying your shares comes with a huge tax bill. As I understand it, you have to pay tax on the difference between the option price and the value at the time you buy them. So if you have a bunch of options to buy at $10 per share, and the company grows to $90 per share by the time you quit/have to buy your shares, you're taxed on $80 a share. Remember, stock in a private company is worthless until you find a buyer, which is one of the reasons the people referenced in the article had to go into debt to exercise their options. 30% of a large amount of imaginary money ends up causing a gigantic tax bill, paid in actual money.

hkmurakami 9y ago
This is if you hit AMT, if you have ISOs. One positive for startup employees of the GOP tax bill is that it seeks to repeal AMT for individuals. If you have NQOs, this tax always happens.
- ringaroundthetx 9y ago
  woah there, you committed the cardinal sin of describing something the GOP is doing as positive for people on the West Coast
- khuey 9y ago
  Unless they're also planning to repeal the $100K limitation on ISOs (after which they're all treated as NQOs) this will only be a modest benefit.
  - hkmurakami 9y ago
    Is that the senate version? Also wasn't there a further amendment to that after lobbying to exempt private company shares from this? I recall fred Wilson writing something to that effect.
- rconti 9y ago
  The Senate tax bill does not eliminate personal AMT, it merely "raises the threshold slightly". This could be fixed in reconciliation, but with the way things are going, I wouldn't be surprised if the house just votes for the senate bill. https://www.washingtonpost.com/news/wonk/wp/2017/11/30/what-is-in-the-senates-massive-tax-bill-and-what-could-change/?utm_term=.0411f6d44816 https://www.washingtonpost.com/news/wonk/wp/2017/11/30/what-...
rsynnott 9y ago
Which is why, in general, you shouldn’t exercise them unless the company is sold/goes public. Could be worse; in Ireland I’d pay a little over 50% on my options if I exercised them. Which is why I don’t. I certainly wouldn’t be interested in taking a job in a private company where options were a significant part of compensation. EDIT: Just noticed from the article, Uber employees had to exercise within 30 days. Wow. 7 years seems to be normal in this country.
- bsimpson 9y ago
  7 years wasn't normal until Pinterest did everybody a solid and set that precedent: https://medium.com/@michaeldeangelo/unlocking-the-golden-handcuffs-6ac855a371f9 https://medium.com/@michaeldeangelo/unlocking-the-golden-han...
rb808 9y ago
I dont understand this. if they're worthless & you can't sell, why do you pay tax as if the stock is worth $90? Edit: Can someone point me to IRS docs? or blog explaining?
- ringaroundthetx 9y ago
  an unintended consequence of the Alternative Minimum Tax
  - usaar333 9y ago
    This is only an AMT issue when it comes to Incentive Stock Options which nominally don't have this issue. For regular (Non-qualified) options, current value - strike is considered ordinary income when you exercise.
- khuey 9y ago
  Because they're not worthless, they're just not liquid.
  - robrenaud 9y ago
    I wish one could just give a fraction of your stock equal to your marginal tax rate to the IRS, perhaps plus a small fee.
    - thedirt0115 9y ago
      This is maybe rare, but there's at least 1 late-stage startup that gives RSUs and allows you to do this in practice. Where my friend works, they give you the option to either pay your own taxes when your RSUs vest, or they will purchase an amount of RSUs from you to cover your tax bill. Seems like a really good deal for the employees. I don't know if this can translate to options in any way, I'm only familiar with RSUs.
    - seanmcdirmid 9y ago
      The IRS wants to be paid in cash, not illiquid stock.
burke 9y ago
Canada has a good rule for this: There's a special class of company called Canadian-Controlled Private Corporation (CCPC). When exercising options issued by a CCPC, the tax burden is deferred until disposition. https://www.collinsbarrow.com/en/cbn/publications/taxation-of-employee-stock-options https://www.collinsbarrow.com/en/cbn/publications/taxation-o...
- TimPC 9y ago
  Erroneous comment referring to legacy tax rules. I've edited it away for clarity.
  - curmudgeon9 9y ago
    The CCPC status is grandfathered in if your options were granted when the company was a CCPC.
- curmudgeon9 9y ago
  And the company going belly up (or an acquisition scenario where common shares are worth zip) is a disposition that will make the tax due. You can however use the Allowable Business Investment Loss deduction to deduct half, and if you hold the CCPC shares for two years, you can deduct the other half. So the danger zone is the two year window after exercising.

hkmurakami 9y ago

This is if you hit AMT, if you have ISOs. One positive for startup employees of the GOP tax bill is that it seeks to repeal AMT for individuals. If you have NQOs, this tax always happens.

ringaroundthetx 9y ago
woah there, you committed the cardinal sin of describing something the GOP is doing as positive for people on the West Coast
khuey 9y ago
Unless they're also planning to repeal the $100K limitation on ISOs (after which they're all treated as NQOs) this will only be a modest benefit.
- hkmurakami 9y ago
  Is that the senate version? Also wasn't there a further amendment to that after lobbying to exempt private company shares from this? I recall fred Wilson writing something to that effect.
rconti 9y ago
The Senate tax bill does not eliminate personal AMT, it merely "raises the threshold slightly". This could be fixed in reconciliation, but with the way things are going, I wouldn't be surprised if the house just votes for the senate bill. https://www.washingtonpost.com/news/wonk/wp/2017/11/30/what-is-in-the-senates-massive-tax-bill-and-what-could-change/?utm_term=.0411f6d44816 https://www.washingtonpost.com/news/wonk/wp/2017/11/30/what-...

rsynnott 9y ago

Which is why, in general, you shouldn’t exercise them unless the company is sold/goes public. Could be worse; in Ireland I’d pay a little over 50% on my options if I exercised them. Which is why I don’t. I certainly wouldn’t be interested in taking a job in a private company where options were a significant part of compensation. EDIT: Just noticed from the article, Uber employees had to exercise within 30 days. Wow. 7 years seems to be normal in this country.

bsimpson 9y ago
7 years wasn't normal until Pinterest did everybody a solid and set that precedent: https://medium.com/@michaeldeangelo/unlocking-the-golden-handcuffs-6ac855a371f9 https://medium.com/@michaeldeangelo/unlocking-the-golden-han...

rb808 9y ago

I dont understand this. if they're worthless & you can't sell, why do you pay tax as if the stock is worth $90? Edit: Can someone point me to IRS docs? or blog explaining?

ringaroundthetx 9y ago
an unintended consequence of the Alternative Minimum Tax
- usaar333 9y ago
  This is only an AMT issue when it comes to Incentive Stock Options which nominally don't have this issue. For regular (Non-qualified) options, current value - strike is considered ordinary income when you exercise.
khuey 9y ago
Because they're not worthless, they're just not liquid.
- robrenaud 9y ago
  I wish one could just give a fraction of your stock equal to your marginal tax rate to the IRS, perhaps plus a small fee.
  - thedirt0115 9y ago
    This is maybe rare, but there's at least 1 late-stage startup that gives RSUs and allows you to do this in practice. Where my friend works, they give you the option to either pay your own taxes when your RSUs vest, or they will purchase an amount of RSUs from you to cover your tax bill. Seems like a really good deal for the employees. I don't know if this can translate to options in any way, I'm only familiar with RSUs.
  - seanmcdirmid 9y ago
    The IRS wants to be paid in cash, not illiquid stock.

burke 9y ago

Canada has a good rule for this: There's a special class of company called Canadian-Controlled Private Corporation (CCPC). When exercising options issued by a CCPC, the tax burden is deferred until disposition. https://www.collinsbarrow.com/en/cbn/publications/taxation-of-employee-stock-options https://www.collinsbarrow.com/en/cbn/publications/taxation-o...

TimPC 9y ago
Erroneous comment referring to legacy tax rules. I've edited it away for clarity.
- curmudgeon9 9y ago
  The CCPC status is grandfathered in if your options were granted when the company was a CCPC.
curmudgeon9 9y ago
And the company going belly up (or an acquisition scenario where common shares are worth zip) is a disposition that will make the tax due. You can however use the Allowable Business Investment Loss deduction to deduct half, and if you hold the CCPC shares for two years, you can deduct the other half. So the danger zone is the two year window after exercising.